The target price of Texas Instruments or TI (NASDAQ:TXN) was recently raised by more than 14% to $80 from $70 by investment firm Bernstein. In addition, Bernstein's analyst Stacy A. Rasgon upgraded the stock’s rating to Outperform from Market-Perform.
Analyst Optimistic on Continued Margin Growth
Rasgon is optimistic on Texas Instruments’ margin growth in the near future.
The analyst believes that higher margins will help to increase the company’s profits going forward. Moreover, Rasgon believes that less depreciation, improved business mix and cost reductions will aid in margin growth. Also, the analyst expects long-term gross margins to improve to 64%, pointing to an increase of 300 bps from its current levels.
Going by numbers, operating margin expansion in the last three quarters was particularly impressive. Last quarter, TI’s gross margins increased 56 bps sequentially and 300 bps from the year-ago quarter. The company’s gross margin has been improving consistently as more production is shifting to its 300mm line (this resulted in a 40% cost benefit at the die level).
Q2 Numbers
In the second quarter, the company posted earnings of 76 cents, better than our estimate of 72 cents. This followed another massive beat — 4.84% in the previous quarter — indicating that this stock is in good shape.
The upbeat numbers were prompted by strengthening auto and industrial markets. The company’s significant success in certain fast-growing segments of the automotive market is expected to continue as the use of electronic content in cars (currently around $350, or 1% of average car price) is increasing by the day.
Looking Ahead
The company also provided a decent guidance for the upcoming quarter. It expects revenues between $3.34 billion and $3.62 billion (up 3.5% sequentially at the mid-point), in line with the Zacks Consensus Estimate of $3.48 billion at the mid-point. The EPS for the quarter is expected at 81–91 cents, same as the Zacks Consensus Estimate of 86 cents at the mid-point
Zacks Rank #2 (Buy) Texas Instruments is expected to report third-quarter 2016 results on Oct 19.
Bottom Line
Headquartered in Dallas, TX, Texas Instruments, Inc. is an original equipment manufacturer of analog, mixed signal and digital signal processing integrated circuits. The company’s compelling product line, the differentiation in its business and lower-cost 300mm capacity should in combination drive growth.
The stock has been generating solid returns since the beginning of 2016 and has gained approximately 23% year to date.
One of the biggest positives at the moment is the way the company’s margins are expanding. Despite year-over-year revenue declines in the last few quarters, the company’s gross and operating margins continue to grow.
TEXAS INSTRS Price
Stocks to Consider
Safer stocks in the same sector are NVIDIA Corporation (NASDAQ:NVDA) and Advanced Energy Industries, Inc. (NASDAQ:AEIS) , sporting a Zacks Rank #1 (Strong Buy), and STMicroelectronics NV (NYSE:STM) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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